Weekly Market Update

In the US, headline retail sales surprised to the upside following a week of relatively disappointing earnings data from a number of apparel-linked retailers and department stores, including Macy’s, Kohl’s Corp and Nordstrom Inc.. The headline print was +1.3% MoM (vs. +0.8% expected) comfortably above consensus with all component sales measures also beating expectations. Ex autos sales printed a strong gain of +0.8% MoM (vs. +0.5% expected). The retail sales bounce indicates faster US growth in Q2 after an anaemic 0.5% growth rate in Q1. Elsewhere, headline PPI came in a touch lower than predicted at +0.2% MoM (vs. +0.3% expected) with core PPI up +0.1% MoM in line with expectations.

Adding to positive US sentiment, the University of Michigan consumer sentiment index rose an impressive 6.8pts to 95.8 (vs. 89.5 expected) to the highest level since June last year. The index was slightly muted by a reduction in 1 year inflation expectations, most likely guided by the recent FOMC rhetoric, although 5-10 year expectations nudged the data up one-tenth to 2.6%.

Further to the positive consumer releases, the latest NFIB and JOLT surveys suggested that the US labour market is in a healthier state, with labour market slack beginning to diminish, than the March US Jobs report had previously implied. The NFIB hiring expectations index rose to 11 (from 9) in April and is now at a level consistent with monthly gains in private payrolls of close to 300,000. Despite this, initial jobless claims last week climbed 20k to 294k (vs. 270k expected), the highest level since February last year. The increase was largely attributable to the state of New York where claims were up 23k.

In the UK, the focus was on the BoE inflation report following the unanimous 9-0 vote to leave rates on hold at 0.5%. Given the economy’s recent weakness, it is no great surprise that the BoE forecast for GDP growth this year has been cut, from 2.2% to 2%, coupled with further cuts to the 2017 and 2018 forecasts. Inflation guidance was little changed but slightly steeper in the near term and once again sent a warning to financial markets that their interest rate expectations are too low. The report also made mention of the referendum, warning that a Brexit ‘could lead to a materially lower path for growth and a notably higher path for inflation’. Governor Carney also warned of the possibility of ‘material effects on the exchange rate’ and even the possibly a ‘technical recession’. The latest ICM poll on the 8th May puts the out campaign ahead with 46% voting to leave and 11% still undecided. In contrast the mean betting odd is 2/7 in favour of a stay vote.

Disappointing UK industrial figures for March confirmed that growth remained precariously unbalanced in Q1. The headline index reported a +0.3% MoM gain (vs. +0.5% expected), while the Q1 print of -0.4% marked the second consecutive quarterly decline, confirming a recession in the UK industrial sector.

Turning to China and a busy weekend followed an eventful week for data releases. Chinese industrial growth disappointed, marking just +6.0% YoY growth in April (vs. +6.5% expected). Nominal growth of retail sales also dropped to +10.1% YoY (vs. +10.6% expected), from +10.5% in March. CPI however noted gains of +2.3% YoY in April which is both in line with March and relative to expectations. Food prices again drove the number and were up +7.4% YoY with non-food prices currently +1.1% YoY. Meanwhile, PPI increased by 0.9% last month and more than expected to -3.4% YoY (vs. -3.7%).